China’s carbon market could have material impact by 2025 finds Schroders

EU ETS is already influencing global warming pathway, says asset manager’s latest assessment

Carbon markets are beginning to show signs of materially contributing to decarbonisation, with China’s new emissions trading system set to cut the country’s emissions by up to six billion tonnes a year by 2060, according to research from Schroders.

In the latest iteration of its Climate Progress Dashboard, the asset manager claims that the long-term global warming trajectory has fallen for three consecutive quarters, driven primarily by increasing carbon prices. 

“Current activity indicates a global rise in temperature of 3.4°C as of 30 June 2021, down from 3.6°C recorded at the end of March and the lowest reading since the dashboard was launched,” it said. “Continued increases in carbon prices were the biggest driver of change over the last quarter, with carbon prices on the European Union's Emissions Trading Scheme (ETS) – the world’s largest exchange – reaching new highs in July, approaching €60 a tonne”. 

After years of floundering, carbon prices under the EU ETS have boomed over the past 18 months, in part because of changes introduced by European policymakers to control supply and demand dynamics for carbon credits. 

Schroders also teamed up with the Asia Investor Group on Climate Change (AIGCC) to look at the impacts of China’s new carbon market, which is expected to replace the EU ETS as the world’s biggest over coming decades.  

Launched last month, the emissions trading system covers more than 2,200 Chinese companies from the power sector, and will be expanded to other sectors such as steel, aviation and paper – eventually expected to cover annual emissions of more than 8 billion tonnes.

Wong Dan Chi, Schroders’ Head of ESG Integration for Asia Pacific and Vice Chair of AIGCC, said: “Investors need to understand the growing and future impact of the national China ETS on a range of carbon-intensive industries and companies as part of their ongoing management of climate risk across their portfolios.” 

The utilities sector could benefit from an over-allocation of carbon allowances at first, suggests the research, but it estimates that the sector will be one of the most exposed to rising prices, which could eventually represent 10% of sector revenue at a $10 carbon price. This is also the case for cement, expected to be included under the scheme by 2025. 

The research expects steel to be covered by China’s ETS by the middle of the decade, and says it will be less affected – with a $10 carbon price representing just 2% of sector revenue. The same timeframe is expected for aluminium with a $10 carbon cost expected to represent 6% of sector revenue.